Wealth of Nations April 2007

Mistaking a Miracle for a Crisis

We are witnessing a transformation of the world economy. The implications of the upheaval are not widely appreciated or understood.
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Suppose that America's labor force suddenly quadrupled. Imagine what that would do to unemployment. How would it be possible to find jobs for all of those people? Think of what it would mean for wages. How would we cope?

We are living through a transformation of just that sort in the world economy. Thanks to the opening of China, India, and Eastern Europe, and to breakthroughs in the technology of international trade, computing, and telecommunications, the internationally engaged global labor force has expanded fourfold since 1980—and most of that increase has happened, in fact, in just the past 15 years. We are in the midst of a great revolution in the way that people interact with one another, as producers and consumers, all around the planet.

To say this, of course, is commonplace: I am not claiming that the phenomenon has been ignored. On the contrary, the debate over how to manage this upheaval has become a driver of national politics in the United States. Despite their familiarity, however, the main facts about globalization, and their full implications, are not well understood. You could sum it up this way: The significance of this transformation is at the same time greatly overrated and greatly underrated.

In the United States, as in every other advanced economy, voters and politicians are preoccupied with the national aspects. Are imports driving down our wages and putting Americans out of work? How far might offshoring of manufacturing and services go?

What will that mean for us? But globalization is, self-evidently, an international event. What happens in any single country is just one highly connected aspect of what is happening somewhere else. What is happening (or thought to be happening) in individual countries has to add up to the big picture, taking the world as a whole, or else one has failed to grasp what is going on.

And when you look at the global context and try to do this adding up, the results are jarring. The global transition really is an awesome shift in economic realities—colossal in scale and bewilderingly fast. Yet, seen in this light, the experiences of individual advanced economies, including that of the United States, seem quite muted. When you contemplate the pace and scale of the global transformation, it seems remarkable that economic life in America and Europe has not been much more dramatically recast.

The surprising thing is that the rich West is coping so easily and so well. America and other wealthy countries have plainly gained in the aggregate from what is going on—and the United States, in fact, has gained more than most. There are political strains, to be sure, but you could not call them unmanageable. Economic issues will be important in the elections of 2008, as they always are, but (so far as one can judge right now) not paramount. That such an enormous and sudden global upheaval can produce, country by country, such comparatively mild and, on the whole, beneficial results surely comes as a bit of a shock.

To get a better sense of both sides of this—the amazing drama of the global transformation and the comparative ease (automatic and unplanned, for the most part) with which the advanced economies have adapted to it—I have some reading to recommend. Don't be put off by the source. Twice a year the International Monetary Fund releases its World Economic Outlook. Because it includes some authoritative global economic forecasts, this is always essential reading for professional and amateur economists, but the newest edition, just out, contains a special chapter (www.imf.org/external/pubs/ft/weo/2007/01/pdf/c5.pdf) that deserves a much wider readership, especially among politicians and the people who work with them. This chapter, "The Globalization of Labor," weighs the implications of the new global economy for workers worldwide. It asks what exactly is going on, which groups are gaining or losing, and what governments might do to protect the victims. The study's global perspective is unusual and especially valuable, for the reason I just mentioned: It forces you to compare the pattern of change in the world as a whole with the effects that Americans are seeing at home.

A good way to gauge the scale of events from a high altitude is to think of globalization—shorthand for the opening up and interconnecting of local and national markets—as an increase in the worldwide supply of labor. The IMF's economists estimate it by weighting each country's labor supply based on the ratio of its exports to its gross domestic product. (So, for instance, if a country had no exports, it would be regarded as contributing nothing to the global labor supply; if its exports accounted for all of its GDP, then all of its workers would be deemed part of the global labor force.) By this measure, the global labor force grew fourfold—fourfold!—between 1980 and 2005, with a marked acceleration after 1990. How? The number of working-age people around the world grew, but that was not the main cause: That rise was only a little more than 50 percent. Most of the increase reflects the surge in exports—in international trade generally—that served to draw vast numbers of new workers into the global labor pool.

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